Follow the Money

The appetite of venture capitalists for investing in new technologies is rebounding: in 2004, venture capital financing in the United States was up 8 percent from the year before, following three years of decline. With the success of Google’s initial public offering (IPO) in August 2004, technology again excited the public imagination. Indeed, the window on IPOs opened wide in 2004, with 233 companies going public on U.S. stock exchanges and raising $43 billion, up from 79 companies and $16 billion in 2003. Biotechnology IPOs were particularly successful, raising $2.5 billion, the most since the $8.7 billion raised in 2000. So why are many of those involved in the funding of emerging technologies so worried?

According to some experts, the kind of basic research necessary to create tomorrow’s technologies is under siege – or at the very least, suffering from neglect. Venture capitalists never entirely stopped investing in companies with technologies just emerging from the lab. But after several years in which high-risk investments were unpopular, many startups developing innovative technologies (especially in such areas as nanotechnology and new genomic approaches to medicine) are starving for capital. Even more worrisome, the federal government’s preoccupation with funding homeland security and national defense, and its resulting cutbacks in support for basic research in other areas, has left many wondering where the funding for research on new core technologies will come from.

For many in the technology community, the threat of crisis became much more vivid in early December when President Bush signed off on the fiscal year 2005 U.S. federal budget. While this year’s budget increases spending for research and development by 4.8 percent to $132.2 billion, most of that increase – 80 percent – goes to defense R&D, and most of that to new weapons development, according to the American Association for the Advancement of Science (AAAS). In fact, defense-related R&D reached a record high $75 billion this year. One winner was the U.S. Department of Homeland Security, which gets a 19.9 percent increase in its R&D budget, to $1.2 billion. The big loser is the National Science Foundation (NSF), which had its R&D budget cut by .3 percent, to $4.1 billion; it was the first cut in NSF’s budget since 1996. Meanwhile, R&D funding for the National Institutes of Health (NIH) increased by just 1.8 percent to $27.5 billion; it was NIH’s smallest percentage increase in years, and well below the rate of inflation.

“Defense and homeland security are very important. I can’t criticize funding increases per se in those areas,” says Shirley Ann Jackson, president of Rensselaer Polytechnic Institute in New York and the 2004 AAAS president. “But the bigger issue is sustaining focus and support for funding of basic research across broad fronts. We have to have a robust base of basic research. We’re talking about potentially eroding that base.” Jackson adds, “Other places will innovate. The question is, are we going to be a leader? If we don’t pay attention to the warning signs, 15, 20 years from now, we could find ourselves in a relatively disadvantageous position in terms of global leadership.”